CoreCivic Inc (CXW) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Corrections Corporation of America fourth quarter 2006 conference call. Before we begin, let me remind today's listeners that this conference call contains statements that are forward-looking as defined within the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made. Factors that could cause operating and financial results to differ are described in the Company's Form 10-K, as well as in other documents filed with the Securities and Exchange Commission, and these factors include but are not limited to changes in the private corrections and detention industry, the Company's ability to obtain and maintain facility management contracts and general economic market conditions.

This call may include the discussion of non-GAAP measures for which the reconciliation for the most comparable GAAP measurement is provided in the Company's corresponding earnings release posted on the Company's website. This Company does not undertake any obligation to publicly release the results of any revision to the forward-looking statements that may be made to reflect effects or circumstances after the date hereof, or to reflect the occurrences of unanticipated events.

Participating on today's call will be the Company's Chairman of the Board, William Andrews; President and Chief Executive Officer, John Ferguson; and his Chief Financial Officer, Irving Lingo. I would now like to turn the floor over to Mr. Andrews. Please go ahead, sir.

Good afternoon, and thank you all for attending our fourth quarter 2006 earnings call and our year-end 2006, and Irv and John will go through some financial numbers with you, and then you'll have an opportunity to ask any questions you may have. So Irv?

Thank you, Bill. Let me begin with our results, fourth quarter results came in at $0.52 a diluted share as compared to adjusted EPS from last year's fourth quarter of $0.40 a share, and that represents an increase in EPS of 30%.

For the full year 2006 net income per diluted share after special items amounted to $1.72, and that was compared to $1.22 for the comparable period last year and that represents an increase of 41%. Earnings for the quarter were positively impacted by increased populations at a number of facilities including Northeast Ohio, T. Don Hutto, Eloy, and Crowley. Although the increase in our federal business is perhaps more visible with major announcements during the year impacting our Eloy, Hutto and Stewart facilities, our state business also kept pace. Federal business represented 40.3% of total revenues for the quarter, while state business represented 48.2% of total revenues. These percentages changed very little from last quarter or even last year.

Adjusted EBITDA increased 23% to $82.6 million and was up 23.7% for the year to $293.8 million. Same-store facility EBITDA for Q4 increased approximately 17.5% over the prior year. Operating income for the fourth quarter was $64.7 million, that's an increase of $14.3 million, or 28.4% over the same quarter last year. Adjusted free cash flow increased 18.4%, came in at $49.1 million while adjusted free cash flow for the full year amounted to $180.6 million.

Anticipating questions regarding payment of cash taxes in 2007, we substantially utilized our federal NOL carry forwards, and thus we will be a cash taxpayer for the full year 2007. Based on the full year guidance that we provided in our press release this morning we expect that adjusted free cash flow for 2007 will approximate amounts generated for the full year 2006.

Turning to operations, total revenue for the quarter was up 10.2% over last year, amounting to $349.6 million. Total compensated man days increased 6.6% to 6.5 million from 6.1 million man days in the previous year. Revenue per compensated man day increased 3.4% to $53.43, up from $51.66 last year. Average compensated occupancy for the fourth quarter came in at 96.6% and that's versus 93.1% last year.

As I said previously the mix of federal and state revenues for the quarter remain relatively constant from last year. Since there was little change in customer mix the 3.4% increase for the quarter is substantially due to increases in pricing power brought about by the tight supply of prison beds. For the full 12 months revenues per compensated man day were actually up 4%.

Our press release does a pretty good job of detailing the changes in fixed and variable costs. So just a few comments here. First of all, operating costs for the quarter increased less than 1% to $38, from $37.92 in the fourth quarter of last year. Fixed expenses actually decreased slightly for two reasons. First, increases in fixed expenses were muted as we did experience lower than anticipated increases in benefits, particularly in the area of Workers' Compensation. Secondly, we spread these costs over the 400,000 additional man days in our prior year. This is an important point. Approximately 86% of our fixed costs are personnel related, and once a facility reaches a certain occupancy level, say 80% to 85%, we have substantially all of our fixed costs in place. At that point, our business model improves dramatically as we leverage these costs over larger numbers of inmates.

Variable expenses were up 1.6%, an increase of $0.16 per compensated man day. As indicated in the press release, most of the increase in variable expense this quarter related to miscellaneous supplies we needed to buy in conjunction with the ramp-up of operations at three facilities. I would also add that I was quite pleased throughout the year with our control of variable expenses, particularly in the area of medical, which for this quarter was up only 1%.

We have worked hard in a number of areas to reduce medical costs, including modifying a number of our contracts to reduce or eliminate our responsibility for medical expenses. The end result was that operating margins per man day increased $1.69 to $15.43 from $13.74 last year. Our margin percentage increased 28.9% from 26.6%.

Looking forward, we have several reasons for optimism regarding our margins. First, is the aforementioned leveraging of fixed costs as our occupancy levels move higher. Second, we are beginning to see additional pricing power as a result of the overall scarcity of beds. Finally, we're undertaking a number of efficiency initiatives and turnover reduction initiatives which will result in cost savings in 2007 and 2008.

One more comment regarding margins. As we move forward with our development plans in any given quarter we may experience ramp-up costs associated with new facility openings. We certainly expect that to be the case in 2007, particularly as we begin ramping up for the opening of Saguaro late in Q1 and throughout Q2.

G&A expense for the quarter and year ended December 31, 2006 came in at roughly 4.8% of revenues. As we've said before, our goal is to keep this number below 5% of total revenues. Given the commitment we have made over the last several years to expanding corporate office support in the area of operations, information technology, business development and human resources, we're quite pleased that we have thus far been able to meet that goal of staying below 5%. We consider our G&A expenditures to be an investment which should benefit field operations. Indeed, we believe that a part of our operating margin improvement that we have seen is directly related to this investment in G&A.

Income taxes for the quarter were computed based upon a 36% rate, and for the quarter, and at 36.75% for the full year. We currently anticipate a rate of between 37% and 38% for 2007. We'll update you if that changes each quarter as we go forward.

So in summary, Q4 caps a very strong year for our Company. Revenues increased at higher than historical rates, we executed well in controlling operating costs, and the positive supply/demand environment for prison beds resulted in higher prison populations, additional leveraging of fixed costs, and as a result higher operating margins.

I'd like to now touch base on the status of our bed inventory and on our development activities. At January 31, the Company had had approximately 3,000 beds in its existing inventory with the largest block of this space being in North Fork with 428 beds and Stewart with 450 beds. Most of these beds are committed to customers. In fact, we're finding ourselves essentially needing to allocate beds. As a result of the impending absorption of these beds, we're underway with the development activity that you see highlighted in our release.

We're currently underway or have signed development agreements for approximately 4,000 expansion beds which will be delivered over the next 15 months. Roughly 2,600 of these beds are being developed for specific customers. However, none have a guarantee of occupancy. The 960 development beds at North Fork and the 360 beds currently at Tallahatchie represents speculative development. However, based on the demand that we're seeing, particularly for beds at North Fork, we're quite comfortable that any risk represented by this development is minimal.

With respect to new development we expect to complete the 1,900-bed Saguaro facility this June and will begin the process of transferring Hawaiian inmates from our Diamondback and Tallahatchie facilities to Saguaro over the remainder of the year. Concurrently, we will begin working on backfilling the vacated Diamondback and Tallahatchie beds. Given anticipated requirements from both California and Arizona, we're optimistic with respect to such backfill.

Over and above these activities we have been actively working on identifying and permitting sites for new prison development. Based upon our progress to date we continue to believe we should be underway at some point during 2007 with an additional 4,000 to 6,000 beds. Again that is 4,000 to 6,000 beds over and above what we currently have under development. So adding this all up, we have approximately 3,000 beds in our existing inventory, almost 6,000 beds currently under development, and we believe we can have another 4,000 to 6,000 beds underway during 2007 for delivery in 2008 and 2009. This adds up to a potential between 13,000 and 15,000 beds to meet existing and future demand and to drive the Company's earnings growth for the next three years.

I'll wrap up with a quick overview of our outlook for 2007. As indicated in our press release, guidance for Q1 is in a range of $0.43 to $0.47, and guidance for the full year is in the range of $1.95 to $2.05. You will recall that Q1 is a seasonally weak quarter both due to the payment of unemployment taxes, which takes place in Q1, and also due to the two fewer operating days in February.

The guidance for CapEx is included in the press release and incorporates spending for maintenance CapEx, CapEx anticipated for information technology, and expenditures related to announced construction projects. Should we announce new projects during the course of the year the CapEx guidance will be updated in the following quarter. As I have said before, we do not make a habit of parsing our guidance, but in order to provide some additional color I will add the following.

As we all know, California represents a significant opportunity for our Company, but there's clearly uncertainty around California's ability to continue to send inmates out of state. We're encouraged at the level of commitment shown by the Schwarzenegger administration and the CDCR in pursuing out-of-state placement of inmates as a solution to what everyone recognizes is an overcrowding crisis in the California prisons. As a result of this commitment and the fact that to date we have received 350 inmates from California we are comfortable assuming, and our guidance incorporates, what we believe is a reasonable increase in our California populations.

Should there be a shortfall in our expectations, whether as a result of an adverse court ruling or for any other reason, we're still optimistic that demand from other customers will ultimately fill our beds, but possibly over a longer period of time. Our guidance also incorporates the start-up expenses related to the opening of our Saguaro facility in June, our estimate for the timing of the overall absorption of our existing inventory beds, which again to date exists primarily at North Fork and Stewart. It reflects the absorption of expansion beds delivered over the course of 2007 and also incorporates absorption of inventory that will be freed up and Diamondback and Tallahatchie upon the opening of Saguaro.

Before turning it over to John, I'd like to make one final comment. As I've said many times in the past, it is difficult if not impossible to time events with certainty, particularly when dealing with a government customer. Overall the outlook for our business remains quite favorable. As we view the landscape, the combined beds of CCA and our private competitors are not sufficient to deal with demand for prison beds that exists today. As a result we have undertaken what we expect will be an aggressive building program to capture a portion of this demand.

The bottom line, and I know I've said this like beating a drum, is that we believe those investors with a more patient time horizon, in other words, those not trying to anticipate the specific timing of events, are more apt to be rewarded when investing in CCA. I will now turn it over to John so he can get into the specifics of our new business prospects.

This morning's press release and Irv's comments have done a pretty good job of describing our current and future bed availability and the visibility of these available beds, as well as the beds becoming available on the opening and ramping of our Saguaro facility this summer. Beginning in our third quarter press release, we've expressed our desire to begin the development of 4,000 to 6,000 new beds for availability in 2008 and 2009. So let me address our two major business segments, and why we continue to see demand for prison and detention beds. The first major business segment, our state customers. We currently have relationships with 20 states including the state of California. Irv has spoken to some of the issues around California. We pointed out in our press release there are things that could affect that relationship, but we are encouraged that the state of California has moved forward with making sure that they have maybe the opportunity for up to 5,700 beds.

I want to talk about the other 19 states, because many of the decisions we have made and will make are tied to those states and not really significantly affected by California. Obviously, if California does in fact need 5,700 beds, then it changes a lot of things. But we as a business development organization are constantly monitoring our customers, getting to know our customers and trying to assess what their needs are going to be in the near term as well as in the long term.

Our current customers, the 19 customers, are projecting over 58,000 bed needs by 2010. These are the projections that they publish. But we as a business development organization spend a great deal of time trying to assess what states really will have needs fit with our availability or comfortable with continuing to utilize the private sector, and we can identify around 14 states that we believe have the need of some 17,000 beds between now and 2010, and we feel very comfortable with them utilizing the private sector and specifically CCA.

Some current activities that is of recent Arizona has put out a 5,700 bed RFP for out-of-state beds. We announced that in addition to signing expansions with some of our Colorado facilities that we are assisting them in getting to these new beds with out-of-state beds in North Fork, and I think it's been published on a consistent basis that Oklahoma feels that they are about to get into a crisis situation with their bed needs.

So as we continue to monitor these, we continue to develop our own projections as to what we think the needs will be in these states and the likelihood that they would look to CCA to utilize the beds that we have.

Turning to our federal customers, the three federal agencies that we do business with, the situation at the Federal Bureau of Prisons is consistent with what it's been over the last several years, running at over 134% capacity, and they continue to grow such that there will be a significant shortfall between what their growing bed need is as well tied to what they're bringing online. Of note is the President submitted his budget the first of this week for fiscal year ending 2008, so that would be October 1, 2007 to September of 2008, and it allows for an increase of $147 million for contract confinement, bringing it to a total of $824 million. And speaks specifically to funding would be used to expand the number of contract prison beds for more than 1,100 by fiscal year '08.

The Federal Bureau of Prisons did award their CAR 6 solicitation, and in doing that they were able to contract for 2,800 additional beds than they had at the beginning of the CAR 6 solicitation. As you remember, this solicitation was to deal with the four inter-governmental agreements that they had that they wanted to be direct contracts. We have always felt that the next CAR solicitation would probably not be activated until sometime in the latter half of 2008, so it's -- we know the 2,800 will assist them but we feel confident that they will be back on a path of some 1,500 beds a year going forward from there. The President's budget has increased the Office of the Detention Trustee by $188 million over its '07 levels.

As we've said repeatedly that the marshall's population needs have been growing some where in the 4,000 bed a year, although we saw this year that just ended that it was only about 2,000, but we do see, as a steady increase in those needs, and those needs are just driven by arrests and charges in federal felony crimes.

The next area is our Immigration Custom Enforcement. We have seen over the last several years, the last two years growing from confinement beds, detention beds from 21,000 to 27,500. Our best estimate is the current utilization is 27,000 beds, and the 2008 budget is increasing the funding to 28,450 beds. We do continue to hear that catch and release elimination of that is working, is helping. And we still point to the Stanford study of a few years back indicating that we'd require in excess of 32,000 beds to fully implement and make the impact that they have there.

Also in the President's 2008 budget, he's calling for the funding of 3,000 new border patrol agents, and a commitment to double the size of the border patrol to over 18,000 new agents before he leaves office in 2009. So we continue to see demand for detention beds as it relates to securing our borders and the effects of the secure border initiative.

So we feel very strong about the demand that is developing, is currently there and is developing, and I can assure you that this business development organization is working to -- 2008 and 2009 to take and provide bed space for the demand of our existing customers. So with that, I will -- we will open it up for questions and answers.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster. Your first question is coming from T.C. Rabold with Banc of America Securities.

Great, thank you. First of all congratulations on yet another good quarter from you guys. Just want to go through a couple of quick things. First, Irv, were there any meaningful ramp costs in the fourth quarter coming out of Stewart, or was that more just in the third quarter?

It was probably more skewed to the third quarter. Fourth quarter was relatively clean, T.C., with respect to start-up.

Okay. And then can you -- I know you talked about your guidance for '07 taking into account a reasonable uptick in terms of California inmates. Can you help us quantify that a little bit and maybe also where that's coming from? Is it coming off the 380 California inmates that you have in your facilities today, or is that uptick from the contract you signed back in October for -- I think was 1,000 with some bit of a 90% guarantee?

I'll do the best I can to help you, but what we have today, I guess, under the original contract, it's now been modified, but the inmates that we have today were delivered in the context of the original agreement that we signed with California. We made a number of facilities available to California in that original agreement. We published that, and it was Florence, North Fork, Tallahatchie and West Tennessee. As you know, our space is very limited, so it's difficult, but we are doing our very best to try to accommodate that and make as much space available as possible.

What I guess I'm trying to say is that there are other customers who also want some of this space. North Fork is a facility, for example, that we are going to make available to California, but is also being made available to Colorado. What we're finding, as I said at the beginning, we're almost on an allocation basis, on a first-come, first-served kind of thing in some instances, and so if California, for example, doesn't show up, say, at a North Fork, at some point for some reason to a court order or whatever, there are other customers that we think would actually step in there and be able to take that space. I'm not going to get specific. I never will, as to how many California inmates, how many Colorado inmates, et cetera.

But I guess what we're trying to convey is, because we're receiving inmates, because the Schwarzenegger administration, the CDCR, seems so committed to this we feel compelled that they are going to do everything they can to make this happen. You also look at the situation in California. They can't build their way out of it so they are going to have to find some innovative solutions like what we're doing here so to us the better bet is they're going to continue to send some out of state. We're pointing out the fact that the courts are there and can get in the way of that, but the administration is committed to doing that.

If it were not to happen or if it were delayed, we do have some customers that we think would take this space. Can't guarantee the timing of it. We have tried to incorporate some of this into the range of the guidance, okay, but nothing extreme. So I guess what I would tell you is I don't think we're making a reach here but we're also trying to disclose everything that's going on and I hope that helps.

Yes, it does. Maybe if I could drill down a little bit more on the cost side as you prepare for California based on the discussions you're having with them, are you seeing any above and beyond ramp costs due to preparations for California, or will that be a situation when they decide to deliver inmates you will then ramp the cost?

Right now they are going into facilities that have a lot of those fixed costs in place, okay, so there may be some ramp, T.C., but I don't know how visible that ramp-up cost would be given where we're targeting right now, okay?

Sure. I just wanted to make sure that you weren't preparing for something that could get yanked back from you just based on the lawsuits that are out there.

If something got yanked back, that's going to create one situation. But as far as having people sitting around waiting for the delivery of California, I would say that's not really an issue right now.

And then just one last question and I'll get back in the queue. On ICE, have you noticed any throttling back from their standpoint given some of the lawsuits that have been put out there? I know lawsuits are kind of part of the business, but there seems to be at least a little more publicity around some of the housing conditions that are being reported on the immigration side. Without getting into the philosophical discussion with that, I'm just curious if that is having any impact on ICE's arrest policies or the volume that you guys have seen from them?

We probably would need some more time to assess that. We will receive in any day several hundred ICE inmates, and we will lose several hundred inmates. What I would say that ICE has done a pretty good job is their rapid removal, and so to know whether there's a trend that we could monitor right now, I'm not sure that we could answer that.

Okay. Fair enough. All right, guys. Thanks so much.

Thank you, T.C.

Your next question is coming from Patrick Swindle with Avondale Partners.

One comment. I just don't want to leave anybody the impression that these facilities that are being reported in the paper of ICE are in any way substandard. In fact, they're above standard and the reports come from special interest groups that are attempting to do away with privatization and the whole immigration situation. We welcome anybody to visit our facilities and the family facility, particularly at T. Don Hutto, is almost like a home. So I don't want to leave the impression with that last question that the gentleman said the news in the papers was somewhat negative.

Go ahead, Patrick, if you're on.

Yes. First question, are you all aware whether or not California has begun to notify the inmates that will transferred under the involuntary release program yet?

There was an issue today, it was a news article out where I think two inmates were suing that were involuntary, so it may have begun, Patrick. I'm not positive about.

There's a 10-week period at which the inmates have to appeal transfer so it's probably most likely we would not begin to see a meaningful increase unless the voluntary transfers pick up for at least a month or so. Is that fair? Maybe even into the second quarter.

Yes, we still believe there's some voluntary transfers that will be going first, as well.

From a guidance standpoint at what point right now are you anticipating you will begin depreciating Saguaro and stop capitalizing interest on the facility?

June to July, Patrick. It's scheduled right now to open in June. So assuming no delays I think it would be June. Say June 1.

Now, can you talk on a very high level about the impact the movement by California to absorb available beds within the industry has had and is currently having on your other customers? When I look at situations like the contract you have signed with Colorado at North Fork, it would seem like the bed absorption in North Fork has been more rapid than has historically been the case when they've signed contracts up to a certain amount. Do you believe the potential for California utilizing beds is increasing the intensity at which your customers want to utilize beds under existing open end contracts?

Yes.

And then, taking that to another extension, has that begun to show itself in pricing, as well, as you renegotiate contracts?

It is starting to show itself, yes. Can we say that we've experienced, that's still limited, but, yes, it has started to show itself.

Okay. Then the contract that you currently have with the Arizona inmates, 1,200 at Diamondback, expires June 30. Do you all have a sense at would point Arizona is going to move forward with their procurement, I guess with the existing RFP? I guess in theory it it has to happen quickly to have a contract in place before that June 30 expiration.

You know the RFP is out there.

No, I understand that, I guess in terms of -- It seems that they have pushed back the proposal date a number of times and it seems to finally be moving forward but that should be resolved imminently, is that fair?

We still believe that their intent is to make sure there's a new contract in place on July 1, 2007.

All right, and then last question. Press articles have indicated Arizona's appetite, or not appetite, but willingness to pay up for beds effectively given the scarcity of beds is greater than it may have been in the past. Is that an example of the pricing opportunity that you see with other state customers?

Yes.

Perfect. Thank you.

Thank you.

Your next question comes from Barry Stouffer from BB&T Capital Markets. Please go ahead.

Good afternoon. Just two questions. Irv, can you quantify the amount of stock compensation expense in the quarter?

We'll get that number.

The second question I had, given the statistics we have seen out of California about how many inmates were interested in voluntarily transferring out of state why do you not have a higher number of California inmates at this point?

I think what happened was, Barry, that a number of inmates originally in a survey indicated that they would be willing to go, and now when the rubber met the road that number declined. We are also understanding that there's enormous gang pressure in the California system to keep the inmates from volunteering to leave, so I think there was a difference between the survey results and the actual number of volunteers. As soon as I get that number on stock compensation I'll announce that.

Another aside, John Ferguson and myself visited the facility in West Tennessee, and the representative from California was extremely happy with the conditions and the morale of those California inmates that had been transferred and said there was a whole different attitude of them in the new prison than they were in the California prison systems where they had been subjected to gang treatment and they were almost separated by race, and here the blacks and Hispanics and the whites were all in the same common meeting room and were getting along very well together. So I think the people that evidenced that in our facility probably went back and have made more favorable comments and maybe it opens up a little bit again.

Barry, the answer to the other question was it was a little over $0.01 in the quarter.

Okay, thank you.

[OPERATOR INSTRUCTIONS] Your next question is coming from Todd Van Fleet from First Analysis.

Hi, guys. It's Tom in for Todd. Great quarter, by the way.

Thank you.

Had a question. With 5,800 to 5,900 beds that you're constructing or expanding and the 4,000 to 6,000 that you have planned by '09, do you see yourself needing any additional debt financing for that?

We will probably need some additional debt financing for that, yes. I did not incorporate in my comments, our debt by the way was just upgraded this week by Moody's to ba2. So we have debt capacity. I think right now, on an annualized basis, on an EBITDA basis we're about three times debt to EBITDA. I told Moody's and I think they understand that we're underlevered at this point.

So I said in my comments that we did about $175 million in adjusted free cash flow for the year. We expect do do that again next year We have over $100 million of cash on the balance sheet, but if we get into this building program, Tom, yes, we will need some additional leverage. My point is we have enormous capacity for that leverage. We believe, and we're putting together an investor presentation that will be posted here shortly, that we could build 12,000 beds at a cost of $70,000 a bed, which is a little higher than what we're spending, but those 12,000 beds could be built using cash on hand, cash flow, that we would generate over the next couple of years and additional debt. We would not have to issue equity. We would stay within four times debt to EBITDA which is our target.

Okay, thanks for that color. Also, can you say, what was the benefit for Workers' Comp for the quarter if there was one?

It was -- I can't tell that you this is one time but it was unusual. It was about $2 million.

Okay. Thanks a lot. I'll get back.

Your next question is coming from Patrick Swindle with Avondale Partners. Please go ahead.

As you all begin to ramp up your development efforts and seek land purchases and then permitting, are there any roadblocks that you're hitting that are slowing you down at all, or would you say for the most part it's just a function of taking the time to get through the process and get the land permitted to begin construction? Is there anything abnormal that's occurring that would slow that process down?

I don't know what abnormal is. I'm starting to get the headaches I used to when I was in private real estate a long time ago. I would not say anything is abnormal.

I would say to you that a prison will draw a little more heated discussion than, say, will a shopping center, okay, and so we're dealing a little bit with that, and then just the typical issues you get into, environmental permitting regulations are more complex now than they were years ago, so just a number of issues that you have to get over. Every single site that we have been dealing with is unique, whether it's -- whatever it might be, whether it's environmental, the soil conditions, the community acceptance, they're all unique, they're all going to take a little bit of time and the guidance that we give you we try to incorporate that, so oftentimes as you know, these are located in remote areas and the jobs are welcome, the property taxes we pay are welcome, so I would just invite you to stay tuned on that. I wouldn't say anything is what I would call abnormal.

Okay, and then last question for me. We're in the midst of the legislative process in a number of states. Have you seen any movements in any states that would be indicative of them being substantially more aggressive on adding beds themselves? I guess in light of the severe supply/demand imbalance are you seeing any indications that they feel the need to build beds themselves to make sure they have inventory available?

Yes. There are some selected states that are talking about what they would term as a crisis and the need for it, which in some ways works very favorably to us because those are states that we have relationships with that we can begin to point out. You don't need to spend this $200 million. We can deal with that. Yes, there are some states that are feeling the need to develop beds.

California would be one, for example.

No, I understand. Thank you.

One thing, Patrick, you probably dropped off, but what we continue to say is even if they wanted to start tomorrow, it would take three to five years for those beds to come on-line. So as I've said to many of you, in individual meetings, this is a long, slow cycle and we expect the supply/demand conditions where we are today to continue for quite sometime. Go ahead and take the next question.

Your next question is coming from Andrew Berg with Post Advisory Group.

On the incremental beds you mentioned at would point in the course of this year do you think you make the decision whether to go or no go on that incremental 4,000 to 6,000?

It will happen at various times during the year. We won't announce anything unless we have our permits in place and are ready to break ground. That's just the way it is.

We have a number of communities competing for these prisons. They do offer jobs and benefits, as I just said, and then we would prefer is that, like we always do, whether it's a contract renewal or a new contract or anything that we're dealing with, when the papers are all signed we'll announce it. You should expect to see those happen as they happen. The announcements come as the paperwork is completed so I think it will be kind of staggered throughout the year.

Okay. So at the point where we may see you use up the planned bed count, at that point is when we start thinking about you might come back to market?

No, right now we are working on sites, and it's -- some of them, couple of sites in Mississippi that have been in the paper, for example, I'm not divulging anything there, but there's been a lot of talk about that. There was a big newspaper article on a site we're looking at in Tennessee, so we're actively moving forward on sites now regardless of what we're building. There's that much demand out there.

Okay, great. Nice quarter.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question is coming from Todd Van Fleet from First Analysis. Please go ahead.

Hi, guys. I was just wondering what was the deferred interest expense for the quarter?

You mean capitalized interest?

Yes, sorry.

Okay. One second, we'll have it. $1.2 million.

Okay. Thanks.

[OPERATOR INSTRUCTIONS] There appear to be no more questions at this time. I would now turn the floor over to management for any closing remarks.

As usual I'll try to sum up what's been said here and in my opinion, CCA had a great year and everything appears positive and for any of the management people that are listening in I want to thank them for all they've done this year to make this a great year. Just to wrap up some of the key points that were made, our earnings for the fourth quarter are up 30%, our earnings for the full year are up 41%, our occupancy rates are up from 93.1% in the fourth quarter of 2005 to 96.6% in 2006.

Our EBITDA is up 23% for the quarter and 27% for the full year. Our EBITDA for the full year is $293.8 million. Our free cash flow is $180.6 million for the full year as compared to $128 million from last year. Our revenues are up 10%. Our operating margins are up from 26.6% to 28.9%, and I believe most of this is coming from an increase in revenues per man day more so than from a reduction of actual expenses. We're not increasing our expenses, but this has mostly come from pricing.

Everyone has talked about beds. We are looking at putting on 13,000 to 15,000 beds between now and end of 2008 to meet this demand that we continue to see, and I think the wind is at our back, the market is very positive on both the state and federal business, both now and it looks like for the near future, and Irv has indicated our guidance at $0.43 to $0.47 for the first quarter of 2007 and $1.95 to $2.05 for the full year. So with that, I want to thank you again for participating in the call, and I appreciate your interest in this Company. And good afternoon.

This does conclude today's Corrections Corporation of America fourth quarter and year end conference call. You may now disconnect. Have a wonderful day.